A Ripening EMV Migration Catches up to Cardmaker CPI Card Group

Payment card maker CPI Card Group Inc. says it will focus on small and mid-size issuers migrating from magnetic stripe cards to cards bearing an EMV chip in 2017 as it contends with a saturating market for the advanced cards.

As larger banks and credit unions complete their migration programs, demand for chip cards has eased. That is largely responsible for the diminished financial results in 2016 when compared to 2015.

Littleton, Colo.-based CPI released its fourth-quarter 2016 and full-year results on Wednesday. Fourth-quarter revenue of $67.4 million was 28% less than the $93.6 million it recorded in the same quarter in 2015. Its net quarterly loss worsened from $2.3 million in 2015 to $4 million in 2016.

For all four quarters of 2016, CPI has revenue of $308.7 million, a 17.5% decrease from $374.1 million in 2015. Its 2016 profit of $5.4 million was 82.5% lower than 2015’s total of $30.9 million.

“In the U.S. debit and credit markets, the conversion of magnetic-stripe cards to EMV chip cards, what we refer to as the EMV card migration, is expected to continue in 2017, albeit at a slower pace, with the conversion activity concentrated in the small and mid-sized issuers,” Steve Montross, president and chief executive, said during a conference call with analysts, according to a SeekingAlpha.com transcript. “Overall, we believe that EMV card penetration in the debit and credit markets will increase to about 80% by year-end 2017, which is up from about 65% at the end of 2016.”

In 2017, CPI expects card volumes to be similar to 2016 levels, with cards issued by small and mid-size issuers expected to take up some of the volume. CPI said the average selling price of one of its cards was 97 cents at the end of 2016, compared with $1.05 in 2015.

These smaller issuers are one part of CPI’s three-part plan to boost its sales in 2017. A focus on services, including its Card@Once instant-issuance service, which had 5,600 installations at more than 1,200 banks and credit unions, is another component. CPI also intends to develop its prepaid card business, with an emphasis on retail, payroll, and corporate incentives and benefits, Montross said.

The effort may pay off. “The mix shift toward more profitable small and midsize issuers along with internal cost initiatives should help improve profitability, but quarterly results can be volatile due to the timing of orders and management-cited visibility only into the next four to eight weeks,” noted Robert Napoli, a William Blair analyst, in a research note.

Much of CPI’s card production will focus on contact chip cards, which are dipped into readers. Some chip card makers have anticipated selling more dual-interface cards, which also have a contactless payment capability, but CPI assumes these cards will have “limited market adoption” in 2017.

Napoli also commented that he characterizes dual-interface card as a “when” and not an “if” in the U.S. market, “but timing for material adoption is unclear.”